Art’s-Way Manufacturing Co., Inc. — Form 10-Q Summary
Reporting period: Three and six months ended May 31, 2017; filed July 14, 2017. The company manufactures agricultural equipment, modular buildings and steel cutting tools. The pressurized vessels segment was discontinued in October 2016 and is presented as discontinued operations.
Financial Results and Position
| Metric | Three months ended May 31, 2017 | Prior-year period | Six months ended May 31, 2017 | Prior-year period |
|---|---|---|---|---|
| Sales | $4.689 million | $5.298 million | $9.111 million | $11.011 million |
| Gross profit | $811 thousand | $1.484 million | $1.925 million | $3.112 million |
| Gross margin | 17.3% | 28.0% | 21.1% | 28.3% |
| Operating income (loss) | $(721) thousand | $64 thousand | $(1.074) million | $285 thousand |
| Net income (loss) | $(528) thousand | $(57) thousand | $(778) thousand | $24 thousand |
| Net loss per share | $(0.12) | $(0.02) | $(0.18) | $0.01 |
- Cash flow: Net cash used in operating activities was $617 thousand for the first six months, compared with $2.191 million of cash provided in the prior-year period. Capital expenditures were $294 thousand, and net cash used in investing activities was $243 thousand.
- Cash and liquidity: Cash declined to $213 thousand at May 31, 2017 from $1.064 million at November 30, 2016. Accounts receivable were $1.937 million and inventories were $13.955 million.
- Debt: The company had $3.734 million outstanding on its $4.5 million revolving credit facility, with $658 thousand of borrowing-base availability. Total term debt was $3.482 million, including $2.527 million classified as current. Most U.S. Bank debt and the revolving facility mature September 25, 2017.
- Equity: Stockholders’ equity was $16.760 million, compared with $17.476 million at November 30, 2016. Shares outstanding at July 13, 2017 were 4,162,752.
Material Changes Versus Prior Comparable Period
- Sales decreased 11.5% in the second quarter and 17.3% year to date, primarily because of lower demand for agricultural products and modular buildings.
- Agricultural Products sales declined 11.4% in the quarter and 15.9% year to date. Its gross margin fell to 13.8% in the quarter from 26.3%, reflecting lower volume and production inefficiencies during the launch of a commercial forage box.
- Scientific, the modular buildings segment, experienced sales declines of 29.0% in the quarter and 41.8% year to date, driven largely by weaker livestock markets and project overruns.
- Metals sales increased 32.8% in the quarter and 23.8% year to date, while gross margin improved to 30.2% and 32.8%, respectively, attributed to improved energy-industry demand and higher sales activity.
- Engineering, selling and general and administrative expenses increased year to date, while expense levels remained high relative to reduced sales.
- Discontinued operations generated no revenue in 2017 versus $443 thousand in the quarter and $1.122 million year to date in 2016, and produced a six-month loss of $15 thousand.
Outlook, Risks, Contingencies and Unusual Items
- Going concern: Management stated that operating losses, depleted working capital, upcoming debt maturities and expected continued weakness in the agricultural economy raise substantial doubt about the company’s ability to continue as a going concern. The financial statements contain no adjustments for this uncertainty.
- Debt covenant default: The company was in compliance with its U.S. Bank covenants except for the fiscal-year-to-date EBITDA requirement. It was therefore in technical default under the revolving facility and certain term loans. No acceleration notice had been received, and management was negotiating a forbearance or similar arrangement.
- Liquidity actions: Management is pursuing debt restructuring with longer amortizations and lower payments, expense reductions, possible additional capital, and sales or leasing of real estate. The company stated that current operating cash flows and financing arrangements are not expected to fund operations and debt obligations over the next twelve months without additional financing or asset sales.
- Asset dispositions: The company is liquidating the discontinued vessels business and primarily seeking to dispose of related real estate. The West Union facility was reclassified as held for lease, with a net balance of $1.131 million; the Dubuque facility was identified as available for sale.
- Backlog: Continuing-operations backlog was $3.874 million as of July 10, 2017, versus $3.089 million one year earlier. Management cautioned that backlog is not necessarily indicative of future revenue because of cancellations and dealer discounts.
- Other risks: Key risks include depressed agricultural and livestock markets, seasonal demand, financing availability, debt covenant compliance, product-development and production execution, project overruns, warranty costs and the ability to realize value from asset sales.
- The company reported no material pending legal proceedings and no off-balance-sheet arrangements. Management concluded that disclosure controls and procedures were effective.
Investor Verification Items
- Confirm the status and terms of the U.S. Bank forbearance or refinancing arrangements and whether the September 2017 maturities were satisfied, extended or accelerated.
- Assess the company’s ability to maintain minimum liquidity and meet the August 31, 2017 EBITDA covenant and subsequent debt-service requirements.
- Verify cash generation, inventory levels and borrowing-base availability, particularly given only $213 thousand of cash at quarter end.
- Evaluate whether agricultural-product demand, the commercial forage box launch and Scientific project execution improve margins and operating performance.
- Track the timing and proceeds of proposed real-estate and discontinued-vessel asset sales and their effect on debt reduction and working capital.
- Review the going-concern disclosures and any subsequent financing, restructuring or capital-raising activity.